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On the whole the price of gold and silver tend to move in the same direction. If gold is up then silver is up and the same for when one or the other is down. But, rather like the FTSE and the Dow Jones, which often move in tandem, the ratio between the two can change from one extreme to the other.
It is these extremes that allow investors to make the call that one asset is overpriced and the other is underpriced. If an investor holds the overpriced asset then they will look to sell it and buy the undervalued asset.
The gold/silver ratio is used to identify possible extreme moves, which maybe a good time to sell holdings in one and use the proceeds to switch into the other. It’s easy to calculate by simply dividing the price of gold by the price of silver. At the time of writing the ratio stands at 64.12 and has bounced off a one year low of 58.41 recorded in the middle of September.
The extremes in the ratio over the last thirty-five years have been 14.9 in 1980 and 99.8 in 1991. Since 1991, there has been a low of around 40 (1998), a run up to around 80 (2003), a dip back down to 43 (2006) and only last year the ratio hit a peak of around 84 before falling back to its current level.
So, it looks like there’s a bit of a trend developing and from where we currently stand is the trend set to continue to test the low forties again? This would entail silver strengthening more than gold, but that goes against what’s been happening over the month as we’ve seen gold race ahead, bursting through to new record highs whilst silver has been slightly left dusting itself off.
The arguments for gold to continue tracking higher at a greater pace than silver are compelling. Production in gold has been falling since 2000 and Central Banks have become net buyers of gold. For example, the Reserve Bank of India just recently bought half of the gold sold by the International Monetary Fund and the Central Bank of China, who hold vast reserves in US Treasuries, are purchasing gold to diversify their assets and not be wholly reliant on their US Treasury reserves which are depreciating by the day as the US dollar falls.
On top of this, the gold phenomenon is being fuelled by its usual haven as an inflation hedge and alternative investment asset.
As regards silver, in March 2008 the price hit a nominal high of $20.86 and now as gold rallies to new highs, silver is lagging at around $17.60.